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Saturday 24 February 2018

Citigroup and Zalando - two very different investment opportunities


The market is still cautious about Citigroup, but there is room for a more positive outlook
The market is still cautious about Citigroup, but there is room for a more positive outlook

Des Doyle

Citigroup Inc is a diversified financial services holding company that provides a wide range of financial services to individual and corporate customers. These services include retail brokerage, investment banking, corporate banking, and cash management products & services.

Citigroup serves customers around the globe and has around $1.7 trillion in assets, circa $930bn in deposits, and over 200m customer accounts.

Travelers Group and Citicorp agreed to merge in 1998, forming a new company to be known as 'Citigroup Inc'. This merger created the largest financial services company in the world at the time. Run by Sanford 'Sandy' Weill, it continued to acquire businesses over the following years.

Citigroup was particularly hard hit by the 2008 financial crisis. Of all US financial companies that were in difficulty, Citigroup exposed the US taxpayer to the largest potential losses. The US government had to guarantee close to $500bn in loans and securities, and it injected $45bn into the company in return for a 34pc stake.

Most of Citigroup's efforts in recent years have focused on disposals, cutting costs, downsizing and repaying debt through asset sales and other restructuring measures. Citigroup has made great progress in winding down its 'Citi Holdings' operations which, at its peak, had an enormous $600bn in assets.

The market continues to look at Citigroup cautiously, yet many of the headwinds of the past are receding. The quality of the business is much higher than before. The company continues to have large exposure to emerging economies; after years of underperformance, these regions are now showing strong growth.

Regulatory challenges are much reduced and the company will also benefit from the (gradual) rise of US interest rates. The company has excess capital and years of rationalisation should see a strong rebound in profitability.

The current valuation does not reflect the improved quality of the business, nor the medium term earning power of the company. Trading at a Price-to-Book Value multiple of circa 0.85x and a Price-to-Earnings ratio of 13x, we believe there is significant upside potential for the stock.

Relative to Citigroup, Zalando is at the other end of the investment spectrum - we consider it to be a more speculative investment.

Zalando is a leading European online fashion platform, offering a one-stop, convenient shopping experience with an extensive selection of apparel, with free delivery and returns.

It offers over 1,500 international brands, ranging from popular global brands, 'fast fashion' and local brands, and is complemented by private label products. Currently most customers are drawn from the 'DACH' area (Germany/Austria/Switzerland), where its band awareness is very high. It has excellent reach with younger shoppers and on mobile devices.

A key strength of the company is its fashion expertise, which has allowed it to position itself as a partner with high quality brands. Premiums brands work with Zalando because it shares data with them (in contrast to Amazon).

Zalando is preparing for structural changes in consumer buying habits. Supported by strong technology it continues to develop same-day delivery, instant returns and a personalised online environment, as well as offering returns up to 100 days.

Zalando recently introduced a membership subscription programme called the 'Zalando Zet'. This allows access to more customised 'premium' services like pick-up of returns on demand, early access to sales, and access to stylists and fashion experts.

Zalando has the opportunity to drive European adoption of online clothing retail. With significant market share, growing brand recognition and a developing logistics infrastructure, it could have many years of growth ahead of it.

However, the stock is not cheap, trading on an estimated 2018 Price-to-Earnings multiple of 50x. There are risks, but if they can execute successfully, the market opportunity is vast.


Des Doyle, investment manager See disclosures at

Any investment advice in this column is from the author directly and should not be seen as a recommendation from The Sunday Independent

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